Sunday, September 10, 2006

Jerry McKibben - Demographer

I met with Superintendent Yager, Jerry McKibben and others on Thursday night (09-07-2006). The reason for the meeting was to answer questions concerning the demographic studies done for 2002, 2004 and 2006. Upon review of the tables only, I found that the base number for years 2000 through 2003 differed in the 2204 and 2006 studies and these differed from the Indiana Department of Education.

As an engineer, I review numerous reports, studies, designs for accuracy and consistency. When I saw an “inconsistency” with no note on the 2006 study identifying there was a change, I wanted to know the reason for it. It would not be the first time a typographical error had occurred that wound up changing the outcome if it was actually used in a calculation/analysis.

Jerry McKibben is a graduate of Carroll High School, is friendly, comes across as genuinely interested in his subject material and very interested in explaining his methodology and rational behind his assumptions. We agree on many things for example;

  • FWCS is losing students yearly
  • Allen County is growing through people moving into it, not from birth rates. If people stopped moving in and moving out, Allen County would stop growing. I believe he stated the birth rate was 2.08, which is considered the magical number that results in zero population growth.
  • EACS is not growing as fast as the County.
  • This leaves SWAC and NWAC as the two remaining districts that basically get the growth for the county.
Jerry presented data showing the number of housing permits had risen for three years and then began to fall over the past two years and this year so far shows even fewer building permits. Though he did not present what I would call a full cycle (20 to 25 years) of housing permits he does use this to forecast enrollment.

His method breaks down population into its basic elements males, females, age, married status and more. Apparently Perry Township has data on this for a number of years. Using this information and the immigration (not foreigners – those who move into Perry) he forecasts how many births there will be over time to get enrollment numbers. Incorporating how many move out based on age and death of a spouse are also factors.

I do not find fault with his method and I understand it. However, I have in my years of experience found that when you get as detailed as this, that one can end up with the sum of the parts being greater than the whole or being less than the whole. For example one could say there would be 1,500 new people moving into Perry. By allocating these people to their respective categories, one must also subtract from the same identical categories all deaths, out migration, etc. otherwise you can get a compounding error. I am not insinuating or saying that Jerry’s program does this and I should have asked him if his program has a check to verify this is not happening.

My position is, when you look at it the level Jerry has, how accurate can you be with any one variable? In design we place tolerances on a bolt. We then have tolerances on a hole diameter in order to accept the largest diameter bolt. We then might have a position for the hole called out so that the two line up. We can get more complicated by having multiple parts combine. Each has to fit regardless if it at the minimum or maximum of its individual tolerance range. This stack of up tolerance is the same as stack up errors. As you get further from the source the compounding of all these small errors add up. Now the law of averages normally works in your favor where if your assumption was tiny bit high on one and a tiny bit low on another, they cancel each other out. This very well may be the case here.

I looked at the last 17 years worth of actual data and see a remarkable resilience within Perry to roll with the punches. We have experienced two recessions, two Gulf War Conflicts, 9/11, manufacturing jobs leaving, high interest rates and low interest rates and more. If anyone of these had any influence on the growth in Perry I would expect it to show itself in one or more years over the past 17. The only observable hic-cup I did observe was a trend in growth where growth grows for three years followed by slowing growth for three years and then repeats itself. These were very slight changes. Jerry suggested they were the state changing the age at which 5 year olds could start Kindergarten. Moving the date by one month would influence enrollment one time by 8% for that grade level. Over thirteen grades we would see less than a 0.75% change in growth. The state has apparently moved back and moved forward this date several times.

If this small change by the state can be seen mathematically, why then does not interest rates, wars, politics, recessions show up? If these are such big impacts, then they should be observable in the past 18 years. My view as I said before is Perry Township is very resilient. With that said I think growth will be higher than Jerry's forecast, but not by much. Is the difference significant, NO? The forecast is much like a gas gage. Depending on if you driving highway miles or in the city, you tend to know where on the gage you need to fill up. It is a “heads-up” that you better start thinking about doing something. In the case of demographics, I would want something that can give about three to four years notice before the rubber hits the road so to speak. Jerry's forecast could very well be very accurate, only time will tell. I respect Jerry's occupation , forecast and the difficulty under which such calcuations are made.

Now comes the difficult part. To start my next section I would like to explain a few things about cash flow accounting and accrual accounting.

Cash flow accounting pays for all expenses as they come do. Nothing is set aside for future expenditures.

Accrual accounting takes into account that things wear out. If a new roof needs to be done every 20 years then an amount out of each year’s revenues is set aside so that in 20 years there are funds available to pay for the roof without cutting into other projects or floating a bond. The same goes for heating and AC, windows, paint and more. In many ways those items that are replaced on a daily basis (consumables) are built into the budget because their time frame is less than one year. But the larger expenses such as land, buildings, roofs, heating and AC, technology upgrades are not budgeted. The reason I am told is the State of Indiana does not allow school districts to set aside funds for future costs such as buildings or maintenance.

Is this a problem? The most notorious program in the United States that uses Cash flow accounting is Social Security. We all know it is facing huge unfunded liabilities. Just like this program, the NACS system faces an identical monster, on a smaller scale, but just as devastating in terms of percent increase in the tax rate.

When a school is built, a bond is generally floated to pay for it over some period of time 20 to 25 years. However before the bond is paid off, water heaters, roofs, windows, paint and heating units need to be replaced not once, but in some cases twice. If a school district does not accrual these items each year (set aside funds each year to pay for them later), then the school district is forced to float another bond. What happens is that those who are in the school district prior to the floating of the second bond do not pay for any of the maintenance costs associated with these items, but benefit from the prior investment. When a school system gets several schools, then you can get a compounding affect where after a period of time you are floating bonds equivalent to a new school.

In order to fund cash flow accounting, the tax rate will increase for several years after the enrollment has stopped growing and then levels off at a significantly higher rate than that with accrual accounting. With this type of accounting it becomes more difficult for the average person to distinguish the real cost of building a school from the cost of maintaining a school. Generally speaking maintenance costs are about 2% of the schools value yearly.

With this said, the renovation proposal for Carroll High School for $63.75 million is a bit misleading. Within this $63.75 million are budgetary amounts for technology improvements and a heating and AC improvements. These two items do not belong in the analysis for construction costs. Likewise they do not belong in the cost of a new high school either. By combining these costs, many people get the wrong impression of what is happening. Likewise when looking at increasing capacity at a school one must look at the replacement value of a school when it is converted to some other use. Point in case is the Freshmen Academy. Regardless of whether it was a good or bad decision, it has a cost impact. The direct result was that because it was converted from a middle school, the school district floated a bond to build a new 1,000 seat middle school.

What I propose is that all taxpayers in the state of Indiana write their individual legislators to allow our school districts to fund new construction by allowing building funds. Using accrual accounting our tax rates should not change and allow a higher level of funding long term using lower tax rates.

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